UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 10-Q. TTM TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter)

Transcription

1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 29, 2003 Commission File Number: TTM TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) WASHINGTON (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2630 South Harbor Boulevard, Santa Ana, California (Address of principal executive offices) (714) (Registrant s telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No Number of shares of common stock, no par value, of registrant outstanding at November 3, 2003: 40,459,931

2 TABLE OF CONTENTS PART I: FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Condensed Balance Sheets As of December 31, 2002 and September 29, Consolidated Condensed Statements of Operations For the quarter and three quarters ended September 30, 2002 and September 29, Consolidated Condensed Statements of Cash Flows For the three quarters ended September 30, 2002 and September 29, Notes to Consolidated Condensed Financial Statements... 6 Item 2. Management s Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures PART II: OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES

3 TTM TECHNOLOGIES, INC. Consolidated Condensed Balance Sheets As of December 31, 2002 and September 29, 2003 (unaudited) (In thousands) December 31, 2002 September 29, 2003 Assets Current assets: Cash and cash equivalents... $ 18,879 $ 31,314 Accounts receivable, net of allowances of $4,008 and $3,423, respectively... 17,913 24,904 Inventories, net... 10,485 8,165 Prepaid expenses and other... 3, Asset held for sale... 2,797 2,785 Income taxes receivable... 5,230 Deferred income taxes... 1,867 1,399 Total current assets... 60,254 69,286 Property, plant and equipment: Property, plant and equipment, at cost... 72,948 75,678 Less accumulated depreciation... (27,379) (31,714) Property, plant and equipment, net... 45,569 43,964 Other assets: Debt issuance costs, net Deferred income taxes... 14,442 13,826 Goodwill... 63,153 63,153 Intangibles, net of accumulated amortization of $4,164 and $5,094, respectively. 13,865 13,285 Deposits and other Total other assets... 91,683 90,993 $ 197,506 $ 204,243 Liabilities and Shareholders Equity Current liabilities: Current maturities of long-term debt... $ 2,222 $ 4,444 Accounts payable... 12,540 9,421 Accrued salaries, wages and benefits... 3,773 7,852 Other accrued expenses ,126 Current portion other long-term liabilities Total current liabilities... 19,849 23,720 Long-term debt, less current maturities... 7,778 5,556 Other long-term liabilities, less current portion... 2,453 1,966 Total long-term liabilities... 10,231 7,522 Shareholders equity: Common stock, no par value; 100,000 shares authorized, 39,724 and 40,260 shares issued and outstanding, respectively , ,608 Retained earnings... 17,664 20,451 Deferred stock-based compensation... (174) (58) Total shareholders equity , ,001 $ 197,506 $ 204,243 See accompanying notes to consolidated condensed financial statements. 3

4 TTM TECHNOLOGIES, INC. Consolidated Condensed Statements of Operations For the Quarter and Three Quarters Ended September 30, 2002 and September 29, 2003 (unaudited) (In thousands, except per share data) September 30, 2002 Quarter Ended September 29, 2003 Three Quarters Ended September 30, 2002 September 29, 2003 Net sales... $ 20,557 $ 45,327 $ 67,578 $ 126,008 Cost of goods sold... 17,456 35,871 59, ,580 Gross profit... 3,101 9,456 7,888 20,428 Operating expenses: Selling and marketing... 1,534 2,704 4,780 7,893 General and administrative... 1,713 2,740 3,810 8,320 Amortization of intangibles Restructuring charges Total operating expenses... 3,547 5,744 10,398 17,317 Operating income (loss)... (446) 3,712 (2,510) 3,111 Other income (expense): Interest expense... (266) (144) (808) (451) Amortization of debt issuance costs... (10) (32) (31) (71) Other, net Total other expense, net... (84) (72) (339) (253) Income (loss) before income taxes and extraordinary item... (530) 3,640 (2,849) 2,858 Income tax benefit (provision) (1,353) 918 (1,113) Income (loss) before extraordinary item... (369) 2,287 (1,931) 1,745 Extraordinary gain ,042 Net income (loss)... $ (369) $ 2,505 $ (1,931) $ 2,787 Basic and diluted earnings per share: Income (loss) before extraordinary item... $ (0.01) $ 0.06 $ (0.05) $ 0.04 Extraordinary item Net income (loss)... $ (0.01) $ 0.06 $ (0.05) $ 0.07 See accompanying notes to consolidated condensed financial statements. 4

5 TTM TECHNOLOGIES, INC. Consolidated Condensed Statements of Cash Flows For the Three Quarters Ended September 30, 2002 and September 29, 2003 (unaudited) (In thousands) Three Quarters Ended September 30, 2002 September 29, 2003 Cash flows from operating activities: Net income (loss)... $ (1,931) $ 2,787 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary gain... (1,042) Depreciation on property, plant and equipment... 6,722 5,795 Net loss (gain) on sale of property, plant and equipment (64) Amortization of other intangible assets Other amortization Deferred income taxes... 3,329 1,084 Changes in operating assets and liabilities: Accounts receivable, net... 2,095 (6,846) Inventories, net... (31) 2,390 Prepaid expenses and other... (38) 2,934 Income taxes receivable... (618) 5,230 Accounts payable... (2,594) (2,514) Accrued salaries, wages and benefits and other accrued expenses... (351) 3,823 Net cash provided by operating activities... 7,590 14,803 Cash flows from investing activities: Purchase of property, plant and equipment and equipment deposits... (6,686) (4,752) Purchase of intangibles... (350) Proceeds from sale of property, plant and equipment Net cash used in investing activities... (6,673) (4,805) Cash flows from financing activities: Principal payments on long-term debt... (5,906) Sale of common stock for cash, net of offering costs... 15,283 1,738 Proceeds from exercise of common stock options Payment of debt issuance costs... (235) Net cash provided by financing activities... 9,848 2,437 Net increase in cash and cash equivalents... 10,765 12,435 Cash and cash equivalents at beginning of period... 24,490 18,879 Cash and cash equivalents at end of period... $ 35,255 $ 31,314 Supplemental cash flow information: Cash paid for interest... $ 763 $ 230 Cash refunded from income taxes... $ 3,652 $ 5,705 See accompanying notes to consolidated condensed financial statements. 5

6 TTM TECHNOLOGIES, INC. Notes to Consolidated Condensed Financial Statements (unaudited) (Dollars and shares in thousands, except per share data) (1) Basis of Presentation The accompanying consolidated condensed financial statements have been prepared by TTM Technologies, Inc. (the Company ), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These consolidated condensed financial statements reflect all adjustments (consisting only of normal recurring adjustments), which in the opinion of management, are necessary to present fairly the financial position, the results of operations and cash flows of the Company for the periods presented. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company s most recent Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. The Company uses a 13-week fiscal quarter accounting period with the first quarter ending on the Monday closest to April 1 and the fourth quarter always ending on December 31. The third fiscal quarters 2002 and 2003 each contained 91 days. The three fiscal quarters ended September 30, 2002 and September 29, 2003 contained 273 and 272 days, respectively. Expenditures for information technology salaries and expenses for the third fiscal quarter and three fiscal quarters ended September 30, 2002 have been reclassified from cost of goods sold to general and administrative expenses to conform to the 2003 presentation. (2) Inventories Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. Provision is made to reduce excess and obsolete inventories to their estimated net realizable value. Inventories as of December 31, 2002 and September 29, 2003 consist of the following: (3) Earnings Per Share December 31, 2002 September 29, 2003 Raw materials... $ 2,956 $ 2,005 Work-in-process... 5,459 4,667 Finished goods... 2,070 1,493 $ 10,485 $ 8,165 Basic earnings per common share ( Basic EPS ) excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per common share ( Diluted EPS ) reflects the potential dilution that could occur if stock options or other common stock equivalents were exercised or converted into common stock. The following is a reconciliation of the numerator and denominator used to calculate Basic EPS and Diluted EPS for the quarter and three quarters ended September 30, 2002 and September 29, 2003: Quarter Ended September 30, 2002 Quarter Ended September 29, 2003 Per Net Net Loss Shares Share Income Shares Per Share Basic EPS... $ (369) 39,844 $ (0.01) $ 2,505 39,929 $ 0.06 Effect of options and warrants 1,222 Diluted EPS... $ (369) 39,844 $ (0.01) $ 2,505 41,151 $

7 Three Quarters Ended September 30, 2002 Per Net Loss Shares Share Three Quarters Ended September 29, 2003 Net Income Shares Per Share Basic EPS... $ (1,931) 39,426 $ (0.05) $ 2,787 39,849 $ 0.07 Effect of options and warrants Diluted EPS... $ (1,931) 39,426 $ (0.05) $ 2,787 40,714 $ 0.07 The computation of Diluted EPS does not assume exercise or conversion of securities that would have an antidilutive effect on earnings per common share. Accordingly, during periods for which the Company has a loss before extraordinary items, the impact from the assumed exercise of stock options is not considered. In addition, for the fiscal quarter and three fiscal quarters ended September 29, 2003, options to purchase 641 and 730 shares of common stock, respectively, were not considered because the exercise price of the options was greater than the average fair value of common stock during the period. (4) Concentration of Credit Risk In the normal course of business, the Company extends credit to its customers, which are concentrated in the electronics and electronic manufacturing services industries, and some of which are located outside the United States. The Company performs ongoing credit evaluations of customers and does not require collateral. The Company makes judgments as to its ability to collect outstanding trade receivables when collection becomes doubtful. Provisions are made based upon a specific review of significant outstanding invoices, historical collection experience and current economic trends. As of September 30, 2002, five customers in the aggregate accounted for 25% of total accounts receivable. As of September 29, 2003, five customers in the aggregate accounted for 51% of total accounts receivable. For the quarter and three quarters ended September 30, 2002, no customer accounted for more than 10% of net sales. For the quarter and three quarters ended September 29, 2003, two customers accounted for 22% and 12%, and 22% and 14% of net sales, respectively. For the quarter ended September 30, 2002 and September 29, 2003, the Company s net sales to its ten largest customers accounted for 40% and 64% of its net sales, respectively. For the three quarters ended September 30, 2002 and September 29, 2003, the Company s net sales to its ten largest customers accounted for 42% and 64% of its net sales, respectively. If any one or group of these customers were lost or their receivable balances should be deemed to be uncollectible, it would have a material adverse effect on the Company s financial condition and results of operations. (5) Acquisition of Advanced Circuits, Inc. On December 26, 2002, the Company acquired the stock of Honeywell Advanced Circuits, Inc. ( Advanced Circuits ) from Honeywell International, Inc. ( Honeywell ). The acquisition was accounted for under the purchase method of accounting. The fair value of the assets received exceeded the costs to purchase resulting in negative goodwill. In accordance with Statement of Financial Accounting Standards (SFAS) No. 141, the amount of negative goodwill was allocated proportionately to reduce the assigned values of acquired assets. The Company recorded its preliminary purchase accounting allocation in the fourth fiscal quarter 2002 which resulted in the Company recording an extraordinary gain of $6,296. During the three quarters ended September 29, 2003, the Company continued to evaluate the fair market value of assets acquired and liabilities assumed as well as certain contingencies. For the quarter and three quarters ended September 29, 2003, the Company recorded additional extraordinary gains of $218 and $1,042, respectively. The extraordinary gains were composed of certain adjustments to the fair market value of assets acquired and liabilities assumed and a working capital adjustment as defined in the purchase agreement. The Company will continue its evaluation during the remainder of 2003 and may make further purchase accounting adjustments if appropriate. In connection with the acquisition, the Company was entitled to a reimbursement from Honeywell if Advanced Circuits working capital, as defined in the agreement, was less than $13,900. At the closing date, the working capital was less than $13,900. In the quarter ended March 31, 2003, the Company settled its claim against the seller in the amount of $1,400 for the working capital shortfall, which amount was $570 in excess of the estimated settlement as of December 31,

8 The unaudited pro forma information below presents the results of operations for the quarter and three quarters ended September 30, 2002 as if the Advanced Circuits acquisition occurred at the beginning of 2002, after giving effect to certain adjustments (to remove expenses related to assets not acquired and liabilities not assumed and interest expense and amortization of deferred financing costs related to the incremental pay down of debt and the related income tax effects). The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made at the beginning of 2002 or of the results which may occur in the future. Quarter Ended September 30, 2002 Net sales... $ 49,673 Net loss... (8,962) Basic and diluted loss per share... $ (0.22) (6) Restructuring Charges Three Quarters Ended September 30, 2002 Net sales... $ 171,506 Net loss... (55,100) Basic and diluted loss per share... $ (1.40) During the fourth quarter of 2002, the Company consolidated manufacturing capabilities by closing its Burlington, Washington facility to better manage and control its business. The building and equipment are currently held for sale and recorded at their estimated fair value less selling costs. Due to the inherent uncertainty of the estimates involved, the value of the assets held for sale could change in the near term which could result in an additional impairment charge. During the quarter ended March 31, 2003, a $203 restructuring charge was taken for severance and other exit charges primarily in connection with the lay off of 45 employees at the Company s Redmond, Washington facility. The chart below shows the additions to and utilization of the accrued restructuring charges during the three quarters ended September 29, Severance Other Exit Charges Total Balance December 31, $ 325 $ 204 $ 529 Restructuring charges Utilization... (525) (105) (630) Balance September 29, $ $ 102 $ 102 (7) Long-Term Debt and Other Obligations The Company entered into an amendment of its senior credit facility ( Credit Facility ) as of April 30, 2003 to reschedule the payments of its remaining $10,000 term loan to nine equal quarterly installments beginning September 30, 2003; establish a borrowing base for its $25,000 revolving loan facility based upon accounts receivable and inventory; change the interest rates on the term loan and revolving loan facility to rates ranging from LIBOR plus 1.5% to 2.5% or the Alternate Base Rate (as defined in the Credit Facility) plus 0.5% to 1.0%; and modify certain of its financial covenants. The amount added to the LIBOR rate or the Alternative Base Rate varies depending upon the Company s leverage ratio as defined in the agreement. The revolving loan facility final maturity date of September 29, 2005 remained unchanged. As of September 29, 2003, $10,000 was outstanding under the term loan at an interest rate of 2.85% and no amounts were outstanding under the revolving loan facility. As of September 29, 2003, the Company had $15,763 of available borrowing capacity under its revolving loan facility. During the three quarters ended September 29, 2003, the Company incurred additional debt issuance costs of $235 in connection with the amendment to the Credit Facility discussed in the preceding paragraph. These additional costs are being amortized over the remaining life of the Credit Facility. 8

9 (8) Common Stock and Stock Options The Company completed a secondary offering in September 2003 in which the Company sold 200 shares and the selling shareholders sold 12,450 shares at a price of $12.00 per share. The Company received net proceeds of approximately $1,738, after the underwriting discounts of $0.63 per share and other secondary offering expenses of approximately $536. The Company applies the intrinsic-value-based method prescribed in Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees, in accounting for employee stock options. Accordingly, compensation expense is generally recognized only when options are granted with a discounted exercise price. Any resulting compensation expense is recognized ratably over the associated service period, which is generally the option vesting term. Under SFAS No. 123, Accounting for Stock-Based Compensation, compensation cost is recognized for the fair market value of each option as estimated on the date of grant using the Black-Scholes optionpricing model. SFAS No. 148 Accounting for Stock-Based Compensation Transition and Disclosure, amends SFAS No. 123, to provide alternative methods of transition for a voluntary change to the fair market value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require new prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has elected to adopt the disclosure only provisions of SFAS No If compensation expense for all stock options had been determined consistent with SFAS No. 123, the Company s net income (loss) and earnings per share for the quarter and three quarters ended September 30, 2002 and September 29, 2003 would have been as follows: 9 September 30, 2002 Quarter Ended September 29, 2003 Net income (loss): As reported... $ (369) $ 2,505 Add: Amortization of deferred compensation Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects... (548) (592) Pro forma... $ (904) $ 2,003 Basic and diluted earnings per share:... As reported... $ (0.01) $ 0.06 Pro forma... (0.02) 0.05 Three Quarters Ended September 30, 2002 September 29, 2003 Net income (loss): As reported... $ (1,931) $ 2,787 Add: Amortization of deferred compensation Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects... (1,551) (1,788) Pro forma... $ (3,441) $ 1,115 Basic and diluted earnings per share: As reported... $ (0.05) $ 0.07 Pro forma... (0.09) 0.03 During the three quarters ended September 29, 2003, the Company issued options to employees and independent directors to purchase 300 shares of common stock at a weighted-average exercise price of $4.59 per share. During the three quarters ended September 29, 2003, employees exercised stock options to purchase 336 shares of common stock at an average exercise price of $2.78 per share for total proceeds of $934.

10 At September 29, 2003, there were outstanding options to purchase 2,684 shares of common stock with a weighted average exercise price of $5.66 per share. 10

11 Item 2. Management s Discussion and Analysis of Financial Condition and Results of Operations The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated condensed financial statements and the related notes and the other financial information included in this Quarterly Report on Form 10-Q. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of specified factors, including those set forth in the section below entitled Risk Factors and elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis should be read in conjunction with Management s Discussion and Analysis of Financial Condition and Results of Operations set forth in our annual report on Form 10-K for the fiscal year ended December 31, 2002, filed with the Securities and Exchange Commission. Overview We are a one-stop provider of time-critical and technologically complex, multilayer printed circuit boards, which serve as the foundation of sophisticated electronic products. We serve high-end commercial markets including networking/communications infrastructure, high-end computing and industrial/medical which are characterized by high levels of complexity, short life cycles and moderate production volumes. Our customers include original equipment manufacturers ( OEMs ) and electronic manufacturing services ( EMS ) companies. Our time-to-market and high technology focused manufacturing services enable our customers to reduce the time required to develop new products and bring them to market. We manufacture printed circuit boards to our customers design specifications and price them to reflect both the complexity of the printed circuit boards and the time and volume requirements for the order. Generally, we quote prices after we receive the design specifications and time and volume requirements from our customers. Purchase orders may be cancelled prior to shipment. We charge customers a fee, based on percentage completed, if an order is cancelled once it has entered production. We support a broad and diverse customer base. We measure customers as those companies that place at least two orders in a 12-month period. As of December 31, 2002, we had approximately 565 customers, and as of September 29, 2003, we had approximately 590 customers. Sales to our top 10 customers increased from 40% of our net sales for the third fiscal quarter 2002 to 64% of our net sales for the third fiscal quarter Our customer concentration and end market mix both changed in the third fiscal quarter 2003 and three fiscal quarters 2003 as a result of our acquisition of TTM Advanced Circuits, Inc. ( Advanced Circuits ) on December 26, We sell to OEMs both directly and through EMS companies. The majority of our sales to EMS providers are on behalf of OEMs. We generally negotiate product pricing and volumes directly with our OEM customers, rather than with the EMS companies. The following table shows the percentage of our net sales in each of the principal end markets we served for the periods indicated: Third Fiscal Quarter Three Fiscal Quarters End Markets (1) Networking % 41.7% 30.7% 38.1% High-End Computing Industrial/Medical Computer Peripherals Handheld/Cellular Other Total % 100.0% 100.0% 100.0% (1) Sales to electronic manufacturing services companies are classified by the end markets of their customers. 11

12 Critical Accounting Policies and Estimates Our consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the audit committee of our board of directors. Actual results may differ from these estimates under different assumptions or conditions. Accounting policies where significant judgments and estimates are made include asset valuation related to bad debts and inventory obsolescence; sales returns and allowances; impairment of long-lived assets, including goodwill and intangible assets; customer rebate obligations; realizability of deferred tax assets and self-insured medical reserves. A detailed description of these estimates and our policies to account for them is included in the notes to our annual report on Form 10-K for the fiscal year ended December 31, 2002, filed with the Securities and Exchange Commission. Our estimates are based on historical experience as well as relevant facts and circumstances known to us at each reporting date. Actual results may differ from these estimates. We provide customary credit terms to our customers and generally do not require collateral. We perform ongoing credit evaluations of the financial condition of our customers and maintain an allowance for doubtful accounts based upon historical collections experience and expected collectibility of accounts. Our actual bad debts may differ from our estimates. In assessing the realization of inventories, we are required to make judgments as to future demand requirements and compare these with current and committed inventory levels. Our inventory requirements change based on our projected customer demand, which changes due to market conditions, technological and product life cycle changes and longer or shorter than expected usage periods. We maintain certain finished goods inventories near certain key customer locations in accordance with agreements. These customers are generally contractually obligated to assume materials liability after a specified period of time. We derive revenues primarily from the sale of printed circuit boards using customer supplied engineering and design plans and recognize revenues when persuasive evidence of a sales arrangement exists, title and risk of loss has transferred, and collectibility is reasonably assured generally when products are shipped to the customer. We provide our customers a limited right of return for defective printed circuit boards. We accrue an estimated amount for sales returns and allowances at the time of sale based on historical information. To the extent actual returns vary from our historical experience, revisions to the allowances may be required. We have significant long-lived tangible and intangible assets consisting of property, plant and equipment, goodwill and definite-lived intangibles. We review these assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. In addition, we perform an impairment test related to goodwill at least annually. Our goodwill and intangibles are attributable to our quick-turn business. During the fourth fiscal quarter 2002, we performed an impairment assessment of our (i) goodwill in accordance with SFAS No. 142, which requires the use of a fair-value based analysis and (ii) long-lived tangible assets and definite-lived intangible assets in accordance with SFAS No. 144, which requires the use of an analysis of expected future undiscounted cash flows over the remaining life of the asset. As of December 31, 2002, we determined that no impairment existed, except with respect to certain assets held for sale in connection with the closure of our Burlington, Washington facility. At September 29, 2003, we determined that there were no events or changes in circumstances which indicated that the carrying amount of long-lived tangible assets and definite-lived intangible assets may not be recoverable. If forecasts and assumptions used to support the realizability of our longlived assets change in the future, significant impairment charges could result that would adversely affect our results of operations and financial condition. Deferred tax assets are reviewed for recoverability and valuation allowances are provided, when necessary, to reduce deferred tax assets to the amounts expected to be realized. At September 29, 2003, we have a net deferred income tax asset of $15.2 million. This amount is net of a valuation allowance of approximately $12.5 million. Should our expectations of taxable income change in future periods, it may become necessary to record a change to our valuation allowance, which would affect our results of operations in the period such a determination is made. In 12

13 addition, we record income tax expense or benefit at a rate that is based on expected results for the fiscal year. If future changes in market conditions cause actual results for the year to be more or less favorable than those expected, adjustments to the effective income tax rate could be required. We are self-insured for group health insurance benefits provided to our employees, and purchase insurance to protect against large claims at the individual and aggregate level. The insurance carrier adjudicates and processes employee claims and is paid a fee for these services. We reimburse our insurance carrier for paid claims subject to a variable monthly limitation. We estimate our exposure for claims incurred but not paid at the end of each reporting period and use historical information supplied by our insurance carrier and broker to estimate our liability for these claims. This liability is subject to a total limitation that varies based on employee enrollment and factors that are established at each annual contract renewal. Our actual claims experience may differ from our estimates. In connection with our acquisition of Advanced Circuits in December 2002, we became contractually responsible for the majority of a rebate obligation to a customer. The rebate is based on a percentage of net sales to this customer. We made estimates as part of purchase accounting regarding the amount and timing of future net sales to this customer and have applied a discount factor to those estimated rebates to estimate the present value of our obligation. We have also estimated that portion of the total obligation which we believe is a current liability. Based on our future net sales experience with this customer and periodic reviews of our estimates, we may change our estimate of this obligation and the portion that is a current liability. Results of Operations Third Fiscal Quarter 2003 Compared to the Third Fiscal Quarter 2002 The third fiscal quarter ended September 29, 2003 includes the results of operations of Advanced Circuits which was acquired in a stock purchase on December 26, Advanced Circuits results of operations are not included in the third fiscal quarter ended September 30, There were 91 days in the third fiscal quarters 2003 and The following table sets forth statement of operations data expressed as a percentage of net sales for the periods indicated: September 30, 2002 Quarter Ended September 29, 2003 Net sales % 100.0% Cost of goods sold Gross profit Operating expenses: Selling and marketing General and administrative Amortization of intangibles Total operating expenses Operating income (loss)... (2.2) 8.2 Other income (expense): Interest expense... (1.3) (0.3) Amortization of debt issuance costs... (0.0) (0.1) Other, net Income (loss) before income taxes and extraordinary item... (2.6) 8.0 Income tax benefit (provision) (3.0) Income (loss) before extraordinary item... (1.8) 5.0 Extraordinary gain Net income (loss)... (1.8)% 5.5% 13

14 Net Sales. In the third fiscal quarter ended September 29, 2003, our net sales mix shifted significantly towards the networking/communications infrastructure end market and to a lesser extent towards the high-end computing end market due to our acquisition of Advanced Circuits. Advanced Circuits accounted for over one-half of the total net sales for the third fiscal quarter 2003, and the majority of its customers are in the networking/communications infrastructure and high-end computing end markets. These end markets typically consist of products with high average layer counts. Our average layer count increased from 8.6 in the third fiscal quarter 2002 to 14.5 in the third fiscal quarter Net sales increased 120.5% from $20.6 million in the third fiscal quarter 2002 to $45.3 million in the third fiscal quarter 2003 due to the acquisition of Advanced Circuits and organic growth. The organic growth was primarily due to an increase in the volume of printed circuit boards sold at our remaining facilities. Cost of Goods Sold. Cost of goods sold increased $18.4 million, or 105.5%, from $17.5 million for the third fiscal quarter 2002 to $35.9 million for the third fiscal quarter Higher cost of goods sold resulted from higher labor, materials and variable overhead costs associated with an increase in the number of printed circuit boards sold. The volume of boards sold increased due to the acquisition of Advanced Circuits and organic growth at our remaining facilities. In addition, a reduction in fixed costs due to the closure of our Burlington, Washington facility in December 2002 favorably impacted our cost structure. As a percentage of net sales, cost of goods sold decreased from 84.9% for the third fiscal quarter 2002 to 79.1% for the third fiscal quarter 2003 primarily due to improved absorption of manufacturing overhead and greater labor efficiency. In addition, we benefited from lower unit pricing for our direct materials partially offset by higher direct materials costs associated with a sales mix shift towards higher layer-count boards. In connection with our acquisition of Advanced Circuits, no value was assigned to the acquired property and equipment, and accordingly, we record no depreciation expense for the acquired assets. Expenditures for information technology salaries and expenses for the third fiscal quarter 2002 have been reclassified to general and administrative expenses to conform to the presentation for the same period in This reclassification more appropriately reflects the overall corporate nature of our information technology expenses. As a percentage of net sales, the reclassification reduced cost of goods sold and increased gross profit by 1.3% in the third fiscal quarter Gross Profit. Gross profit increased $6.4 million, or 204.9% from $3.1 million for the third fiscal quarter 2002 to $9.5 million for the third fiscal quarter The gross profit increased due to sales volume and gross margin improvements. Higher sales volume resulted from our Advanced Circuits acquisition and organic growth at our remaining facilities. The gross margin improved to 20.9% in the third fiscal quarter 2003 from 15.1% in the third fiscal quarter 2002 primarily due to improved absorption of manufacturing overhead and greater labor efficiency. In addition, we benefited from lower unit pricing for our direct materials partially offset by higher direct materials costs associated with a sales mix shift towards higher layer-count boards. Operating Expenses. Selling and marketing expenses increased $1.2 million from $1.5 million, or 7.5% of net sales, for the third fiscal quarter 2002 to $2.7 million, or 6.0% of net sales, for the third fiscal quarter The decrease as a percentage of net sales resulted from improved absorption of fixed selling costs and a lower commission rate associated with a mix shift to more standard lead-time products. General and administrative expenses increased $1.0 million from $1.7 million, or 8.3% of net sales, for the third fiscal quarter 2002 to $2.7 million, or 6.0% of net sales, for the third fiscal quarter The increase in expenses resulted primarily from higher personnel costs principally attributable to our acquisition of Advanced Circuits; higher corporate governance expenses, principally higher directors and officers liability insurance premiums and accounting and legal fees; transition costs to integrate Advanced Circuits; and higher information technology costs. General and administrative expenses decreased as a percentage of net sales due to the relatively fixed nature of these expenses and our higher sales base. Information technology salaries and expenses for the third fiscal quarter 2002 have been reclassified from cost of goods sold to general and administrative expenses to conform to the presentation for the same period in Amortization of intangibles relates primarily to intangible assets with finite lives from the Power Circuits acquisition, which occurred in July Amortization of intangibles was $0.3 million in both the third fiscal quarters 2003 and

15 Interest Expense. Interest expense decreased $0.1 million from $0.3 million for the third fiscal quarter 2002 to $0.2 million for the third fiscal quarter 2003 due to a lower average outstanding balance on our term loan partially offset by imputed interest expense on other long-term liabilities and higher amortization of debt issuance costs. Other, Net. Other, net, decreased $0.1 million from income of $0.2 million for the third fiscal quarter 2002 to income of $0.1 million for the third fiscal quarter This decrease resulted principally from lower interest income as a result of lower cash balances and interest rates. Income Taxes. Income taxes increased from a $0.2 million benefit for the third fiscal quarter 2002 to a $1.4 million provision for the third fiscal quarter The income tax benefit last year resulted from a pretax loss, and the income tax provision in the third fiscal quarter 2003 resulted from pretax income. Our effective tax rate for the third fiscal quarter ended September 29, 2003 was approximately 37% and the effective tax rate for the third fiscal quarter September 30, 2002 was approximately 30%. Our effective tax rate is primarily impacted by certain non-deductible items, state income tax apportionment and state income tax credits. We record income tax expense or benefit at a rate that is based on expected results for the year. If future changes in market conditions cause actual results for the year to be more or less favorable than those expected, adjustments to the effective income tax rate could be required. Extraordinary Gain. In the third fiscal quarter 2003, we recorded an extraordinary gain of $0.2 million after resolving certain contingencies concerning the fair market value of certain assets acquired and liabilities assumed as part of our acquisition of Advanced Circuits. The fair value of the net assets acquired exceeded the cost to purchase Advanced Circuits, resulting in negative goodwill. In accordance with SFAS No. 141, the amount of negative goodwill was allocated proportionately to reduce the assigned values of acquired assets except current assets and deferred income taxes. The remaining unallocated negative goodwill was recorded as an extraordinary gain. We will continue our evaluation of fair market value of assets acquired and liabilities assumed as well as remaining contingencies during the remainder of 2003 and may make further purchase accounting adjustments if appropriate. 15

16 First Three Fiscal Quarters 2003 Compared to the First Three Fiscal Quarters 2002 The first three fiscal quarters ended September 29, 2003 include the results of operations of Advanced Circuits, which was acquired in a stock purchase on December 26, Advanced Circuits results of operations are not included in the first three fiscal quarters ended September 30, There were 272 and 273 days in the first three fiscal quarters 2003 and 2002, respectively. The following table sets forth statement of operations data expressed as a percentage of net sales for the periods indicated: September 30, 2002 Three Quarters Ended September 29, 2003 Net sales % 100.0% Cost of goods sold Gross profit Operating expenses: Selling and marketing General and administrative Amortization of intangibles Restructuring charges Total operating expenses Operating income (loss)... (3.7) 2.5 Other income (expense): Interest expense... (1.2) (0.3) Amortization of debt issuance costs... (0.0) (0.1) Other, net Income (loss) before income taxes and extraordinary item... (4.2) 2.3 Income tax benefit (provision) (0.9) Income (loss) before extraordinary item... (2.9) 1.4 Extraordinary gain Net income (loss)... (2.9)% 2.2% Net Sales. In the first three fiscal quarters ended September 29, 2003, our net sales mix shifted significantly towards the high-end computing end market and to a lesser extent towards the networking/communications infrastructure end market due to our acquisition of Advanced Circuits. Advanced Circuits accounted for over one-half of the total net sales for the first three fiscal quarters 2003, and a majority of its revenues are from the high-end computing and networking/communications infrastructure end markets. These end markets typically consist of products with high average layer counts. Our average layer count increased from 8.5 in the first three fiscal quarters 2002 to 14.2 in the first three fiscal quarters Net sales increased 86.5% from $67.6 million in the first three fiscal quarters 2002 to $126.0 million in the first three fiscal quarters 2003 due to the acquisition of Advanced Circuits. The net sales increase from Advanced Circuits was partially offset by a decline in net sales from our remaining facilities, due primarily to a reduction in the volume of printed circuit boards sold. Cost of Goods Sold. Cost of goods sold increased $45.9 million, or 76.9%, from $59.7 million for the first three fiscal quarters 2002 to $105.6 million for the first three fiscal quarters Higher cost of goods sold resulted from higher labor, materials and variable overhead costs associated with an increase in the number of printed circuit boards sold. The volume of boards sold increased due to the acquisition of Advanced Circuits partially offset by lower volume sold at our remaining facilities. In addition, a reduction in fixed costs due to the closure of our Burlington, Washington facility in December 2002 favorably impacted our cost structure. As a percentage of net 16

17 sales, cost of goods sold decreased from 88.3% for the first three fiscal quarters 2002 to 83.8% for the first three fiscal quarters 2003 primarily due to improved absorption of fixed manufacturing overhead, principally depreciation. In addition, we benefited from lower unit pricing for our direct materials partially offset by higher direct materials costs associated with a sales mix shift towards higher layer-count boards. In connection with our acquisition of Advanced Circuits, no value was assigned to the acquired property and equipment and accordingly, we record no depreciation expense for the acquired assets. Expenditures for information technology salaries and expenses for the first three fiscal quarters 2002 have been reclassified to general and administrative expenses to conform to the presentation for the same period in This reclassification more appropriately reflects the overall corporate nature of our information technology expenses. As a percentage of net sales, the reclassification reduced cost of goods sold and increased gross profit by 1.1% in the first three fiscal quarters Gross Profit. Gross profit increased $12.5 million, or 159.0%, from $7.9 million for the first three fiscal quarters 2002 to $20.4 million for the first three fiscal quarters The gross profit increased due to sales volume and gross margin improvements. The sales volume improvement was due to our Advanced Circuits acquisition and was partially offset by a reduction in volume at our remaining facilities. The gross margin improved to 16.2% in the first three fiscal quarters 2003 from 11.7% in the first three fiscal quarters 2002 primarily due to improved absorption of fixed manufacturing overhead, principally depreciation. In addition, we benefited from lower unit pricing for our direct materials partially offset by higher direct materials costs associated with a sales mix shift towards higher layer-count boards. Operating Expenses. Selling and marketing expenses increased $3.1 million from $4.8 million, or 7.1% of net sales, for the first three fiscal quarters 2002 to $7.9 million, or 6.3% of net sales, for the first three fiscal quarters The decrease as a percentage of net sales resulted from improved absorption of fixed selling costs and a lower commission rate associated with a mix shift to more standard lead-time products. General and administrative expenses increased $4.5 million from $3.8 million, or 5.6% of net sales, for the first three fiscal quarters 2002 to $8.3 million, or 6.6% of net sales, for the first three fiscal quarters The increase in expenses in total and as a percentage of net sales resulted primarily from higher personnel costs principally attributable to our acquisition of Advanced Circuits; higher corporate governance expenses, principally higher directors and officers liability insurance premiums and accounting and legal fees; transition costs to integrate Advanced Circuits; and higher information technology costs. Information technology salaries and expenses for the first three fiscal quarters 2002 have been reclassified from cost of goods sold to general and administrative expenses to conform to the presentation for the same period in Amortization of intangibles relates primarily to intangible assets with finite lives from the Power Circuits acquisition, which occurred in July Amortization of intangibles was $0.9 million in both the first three fiscal quarters 2003 and Restructuring charges in the first three fiscal quarters 2003 were $0.2 million for severance and other exit costs primarily related to eliminating 45 positions at our Redmond, Washington facility during the first fiscal quarter. Restructuring charges were incurred in first three fiscal quarters 2002 relating to our Burlington, Washington facility. We reduced the Burlington facility s labor force by 141 employees and recorded $0.9 million of restructuring charges in the second fiscal quarter The charges were primarily severance costs. Interest Expense. Interest expense decreased $0.3 million from $0.8 million for the first three fiscal quarters 2002 to $0.5 million for the first three fiscal quarters 2003 due primarily to a lower average outstanding balance on our term loan in 2003 partially offset by imputed interest expense on other long-term liabilities and higher amortization of debt issuance costs. Other, Net. Other, net decreased $0.2 million from income of $0.5 million for the first three fiscal quarters 2002 to income of $0.3 million for the first three fiscal quarters This decrease resulted principally from lower interest income as a result of lower cash balances and interest rates. Income Taxes. Income taxes increased from a $0.9 million benefit for the first three fiscal quarters 2002 to a $1.1 million provision for the first three fiscal quarters The income tax benefit last year resulted from a pretax loss, and the income tax provision in the third fiscal quarter 2003 resulted from pretax income. Our effective tax rate for the first three fiscal quarters 2002 and 2003 was approximately 32% and 39%, respectively. Our 17